Several Hedge Funds to Sue Big Banks for Role in Tom Petters Ponzi Scheme

February 5, 2014

Six hedge funds are seeking to sue JP Morgan Chase, Bank of America, Wells Fargo, and other banks for their role in a $3.65 billion Ponzi scheme.

The hedge funds claim that they lost a combined $177 million to Tom Petters, the Minnesota-based CEO who was convicted for the fraud and sentenced to 50-years in prison in 2010. The banks, the hedge funds allege, aided and abetted Petters’s crimes by allowing him to establish “suspicious accounts.” UBS, the CIT Group, and PNC Bank are also among the defendants.

According to the complaint, filed in New York County Supreme Court and first reported on Tuesday by Courthouse News Service, Petters repaid the banks’ loans with money from his scheme’s victims even after the banks “knew that Petters and his entities, including Polaroid, were insolvent and/or not able to pay their debts.”

Petters ran his Ponzi scheme from 1998 to 2008. His investors, including the hedge funds, believed they were funding a wholesale retail business, mainly electronics that Petters Company Inc. supposedly resold to big-box stores like Costco and Sam’s Club. But Petters had been faking the product orders.

Federal agents arrested him in September 2008. The following December a jury found him guilty of 20 counts of money laundering, mail fraud, wire fraud, and conspiracy.

In a sense, Petters treated the banks as he did any of his victims: scam them into loaning him money, then paying them off with other investors’ loans. The complaint states that the banks combined to provide Petters with a “$250 million revolving credit facility.” In February 2008, the complaint alleges, Petters paid off part of these loans with $43 million that he got from the hedge funds. The next month, he paid J.P. Morgan Chase $24.5 million that stemmed from the hedge funds’ investments.

The complaint, however, accuses the banks of “acting with actual knowledge.” The six hedge funds listed as plaintiffs–Ritchie Capital Management LLC, Ritchie Special Credit Investments Ltd., Ritchie Capital Structure Arbitrage Trading Ltd., Ritchie Capital Management Ltd., Rhone Holdings II Ltd., and Yorkville Investment I LLC–claim that the financial institutions conspired with Petters in the criminal actions. The complaint cites that Chase allowed Petters to established “highly suspicious accounts in London that Petters used to illegally launder money.”

It’s not the first time Petters’s victims have sought to find others liable for the Ponzi scheme’s damage. In August, the liquidator for Palm Beach Finance Partners, a Florida-based hedge fund that filed for bankruptcy in 2009, sued General Electric Capital Corporation, claiming that the company knew about Petters’s fraud as early as 2000 but stayed silent. The suit stated that Palm Beach Finance lost $1 billion to the scheme.